Dealpolitik: Don’t Judge Dimon and the J. P. Morgan Directors by a Number

Thirteen billion dollars is an eye-popping spanking no matter how you look at it. But as much as many would like to, Jamie Dimon and the J. P. Morgan Chase board can’t be judged by that number. They may have responsibility for some of the settlement, but not all of the government-required payments are created equal.

Much of the proposed $13 billion settlement relates to activities that occurred at Bear Stearns and Washington Mutual long before J.P. Morgan acquired the firms.

In making acquisitions, there is nothing wrong with viewing a company’s regulatory problems and the cost of resolving them as a cost of doing business. At least as long as any misconduct has ceased by the time the buyout closes and the company cooperates with regulators following the acquisition.

In the case of Bear Stearns and Washington Mutual, the deals were done with government supervision and at the behest of some of the most senior executives in the Federal government.

So to the extent the J.P. Morgan settlement is paying for the activities of Bear Stearns and Washington Mutual, there is no fundamental problem with J.P. Morgan’s compliance. We haven’t seen allegations that J.P. Morgan itself did anything wrong with respect to these matters. J.P. Morgan just bought the businesses: it gets the profits and has to pay the penalties and damages as well.

It is a different question whether J.P. Morgan adequately considered the regulatory risks when determining to buy the companies and pricing the deal. If J. P. Morgan cut bad deals, of course, its executives and board members should have to answer for that.

During more normal times, a buyer may be criticized for not protecting itself against the target company’s liabilities.That can be done by buying assets (rather than the corporate entities with the liabilities) or insisting on regulatory resolution before closing. But given the pressure the acquired companies, the regulators and the global economy were under when J.P. Morgan was asked to step up neither would likely have been realistic for these deals.

In any event, overpaying for assets or making a bad call on a deal is not an unheard of problem and does not necessarily signal anything fundamentally wrong nor does it go to whether the bank has an adequate compliance program.

Even though most of the settlement apparently falls into this category of alleged errors happening on someone else’s watch, J.P. Morgan has also drawn regulatory scrutiny for events that did occur under its watch.

In recent weeks, J.P. Morgan has reached much smaller settlements regarding the allegations of loss of control over the “London Whale” transaction and the failure to adequately report the carrying value of assets. These are the types of areas that, to me, seem to raise red flags for J. P. Morgan, even though the $1.02 billion in payments for these matters amount only to a fraction of the larger settlement. To the extent there are errors that happened while Mr. Dimon and his board were supposed to be minding the store, shareholders and others have a right to question whether everyone was doing his or her job. Even though the board had a committee look into the London Whale events and aggressively has taken corrective action, the buck has to stop at the top when significant errors have been made.

Compliance errors that happen on current management’s watch cannot and should not be tolerated or viewed as a cost of doing business. However ,most of this $13 billion wallop relates to business practices which apparently had ended by the time J.P. Morgan took over. Those penalties are expensive, and the government may be justified in insisting on them. But for J.P. Morgan, they are just business expenses to the extent they are acquired liabilities